When you should - and shouldn't - tap your Roth IRA early

Most retirement accounts are for one purpose: The money goes in and stays in until retirement — specifically, until the investor turns 59 1/2. Pull it out early and you'll have to pay taxes and penalties.

Understandably, that lengthy lockdown doesn't always sit well with younger investors. Sure, you may not need that money now, but there could be plenty of future circumstances in which you might. Having thousands of dollars stashed behind bars won't bail you out of a job loss, get you out of debt or unlock the door to your first home.

Enter the Roth individual retirement account. Roth IRA contributions are made with after-tax dollars, so its distributions in retirement are tax-free. That's a good perk, but there's more: Because you've already made Uncle Sam whole, you can pull out your contributions at any time without tax or penalty. The word "contributions" is important here; the IRS has different rules for withdrawing the investment's earnings, which may be taxed or penalized if the distribution isn't qualified .

You can use a Roth IRA to save for retirement while knowing that your savings can take a detour, should you need or want it to. But not every detour is worthy. Here's how to decide when it's OK to tap your Roth IRA early.

CONSIDER OTHER SOURCES OF CASH

In an ideal world, you'd have it all — a savings account for short-term goals, another that holds your emergency fund and a Roth IRA for retirement. In the real world, it takes time to build that kind of financial security. In the meantime, it's OK to use, but not abuse, the Roth IRA's multitasking skills.

"What we do with younger clients is set up a liquidity pecking order," explains John Gajkowski, a certified financial planner and founder of Money Managers Financial Group in Oak Brook, Illinois. "Checking accounts come first, then money market or savings accounts. We position the Roth as both a retirement account and an emergency fund, but we really stress the idea of emergency."

However, Roth IRAs have annual contribution limits — currently $5,500 for those under age 50 and $6,500 for those 50 and older — so you can't easily replenish any money you take out. That means your savings goals should include a separate emergency fund, even if it has a lean start.

LET INTEREST RATES BE YOUR GUIDE

The decision to pay down debt or invest generally comes down to a rate showdown: If the interest rate on the debt is higher than a reasonable investment return — 6% is a good threshold — focus on paying down that debt. If the rate is lower, you may be better off making minimum payments.

The decision in another example falls along the same lines: Absent other sources of cash, if the expense you're facing could be charged to a 0% balance-transfer credit card — one you could pay off in full before the interest rate goes up — that's often a better option than tapping your Roth IRA contributions.

"If you can get a free loan without impacting your contribution limit or retirement savings, it's better to keep the money in the Roth IRA," says Doug Amis, a certified financial planner and president of Cardinal Retirement Planning in Cary, North Carolina.

Other expenses for which you can borrow, like education or a home purchase, should be weighed similarly. Consider the cost of a student loan or mortgage interest rates against the cost of raiding Roth IRA investments, and you might find — especially in today's still-low interest rate environment — that it's better to borrow.

Roth IRAs rules offer an extra dose of flexibility in certain circumstances if you need more than what you've contributed. First-time homebuyers can withdraw up to $10,000 of earnings tax- and penalty-free, as long as they've owned the Roth for at least five years. Earnings also can be tapped for qualified education expenses such as graduate school without penalty, though you will have to pay income taxes on the withdrawal.

IT ISN'T A FREE LUNCH

The flexibility of a Roth IRA makes it a tempting dangling carrot, so it's important to remember the end goal. The tax perk that gives you full access to your contributions also turns them into a powerful pot of tax-free money come retirement — if those contributions are left invested.

"The younger you are, the better a Roth IRA is because of the ability to take a little acorn and turn it into a very big oak tree," Gajkowski says. "You end up paying taxes on the acorn, not the oak tree."

_____________________________________________________

This column was provided to The Associated Press by the personal finance website NerdWallet. Arielle O'Shea is a staff writer at NerdWallet: Email: aoshea@nerdwallet.com. Twitter: @arioshea.